CEOCFO:Mr. Siegel, what is the relationship between StoneCastle Financial
Corp. and StoneCastle Partners?

Mr. Siegel:

StoneCastle
Financial Corp. is a publicly traded company on Nasdaq under the ticker BANX.

StoneCastle
Partners, LLC manages just under $13 billion of assets, and is a privately
held company with approximately 70 employees. Our headquarters are in New
York, NY and we have offices across the country. The firm has done about
$5.8 billion of direct investments in over 450 community banks in 49 states,
with the exception being Alaska.

A subsidiary
of StoneCastle Partners,LLC, StoneCastle Asset Management, LLC is the
advisor to StoneCastle Financial Corp. StoneCastle Partners and StoneCastle
Asset Management, LLC own approximately 1% of the shares of StoneCastle
Financial Corp. The balance of BANX is owned by outside investors.

CEOCFO:Would you tell us about StoneCastle Financial Corp. and your role as
CEO?

Mr. Siegel:

The
background of how StoneCastle Financial Corp. came about is quite
fascinating. In part, it came about because of my professional network in
Washington, DC.

One of the
things that we do at the firm, and that I’ve spent quite a bit of time on,
is consulting with financial regulators in Washington and at the state
level. Whether it’s the FDIC, the Federal Reserve Bank, the U.S. Department
of Treasury, the Controller of the Currency or 50 state bank commissioners,
we spend time speaking with them and working on methods of stress testing
banks, resolving troubled banks, as well as, discussing accounting standards
and technology. We are not a paid consultant, so it is more of a hobby, that
has allowed StoneCastle Partners to enter into many discussions about
industry trends that concern regulators and government officials, whether it
is credit or interest rate risk, or simply the lack of capital for smaller
banks. That is what occurred starting after the peak of the crisis. The US
Treasury and the American Bankers Association, which is the largest trade
association for banks in America, were separately concerned about smaller
banks being able to raise capital to grow and set out to find solutions.
Those organizations called on me and our firm because back in the late
1990’s, I was the first in the country to find a way to bring large amounts
of capital to banks from the capital markets, rather than through local
community bank investors.

The Treasury
and the ABA contacted us and said, “You figured it out once before, can you
figure out a new way for capital to come into these banks?” With the
Treasury, together we explored a number of ideas, such as a private stock
market just for small banks, and others. All ideas were considered.

We came up
with an idea of tapping into the public markets and executing on what became
StoneCastle Financial Corp., the first publicly traded and what we believe
is still the only publicly traded closed- end investment management company
solely dedicated to investing in community banks. It took many years to get
StoneCastle Financial Corp. to become a reality. StoneCastle Financial is a
unique vehicle on the public markets. The Company’s investment objective is
to provide income and to a lesser extent capital appreciation through
investment in preferred stocks, subordinated and senior debt, and to a
lesser extent common shares.

The best way
to think about community banks is their size. Out of the 6,100 banks in the
United States today, about 98% of those banks have less than $10 billion in
assets, and are therefore, relatively small compared to a J. P. Morgan at $2
trillion. Most of those small banks do not have the ability to access
capital or issue public stock. These institutions have been around on
average for over 80 years and generate, on average, about a 9% return on
equity year-after-year.

CEOCFO:Do banks need to get comfortable understanding what you can do for
them, especially for those that have been around for a long time and do they
reach out when perhaps they never had to before?

Mr. Siegel:

The most
challenging time for me personally was in the 1990’s when the community
banks typically raised capital through a local common equity investor, like
members of their communities. During that time, there was a long educational
process. When we came out with StoneCastle Financial Corp.as a permanent,
living, breathing company that could hold investments in banks as a passive
investor, we revisited this issue. The idea of making an investment in their
banks, either through an income equity, preferred stock or subordinated
debt, was not new, so the education process was not long. But it had been
about 6 years since they had access to this specific type of capital.
Therefore, it took a bit of time to reengage with us as new investors
following an extended investment period that was rather dormant.

CEOCFO:Would you walk us through a typical engagement with a bank? Are you
finding them or are they finding you? What are some of the negotiations and
some of the outcomes?

Mr. Siegel:

Good
question. I believe we are one of the largest investors in community banks
in the country, which brings most banks and bank investors to know about us.
In fact, StoneCastle Financial Corp. has an exclusive endorsement from the
American Bankers Association, so we are the only entity that the American
Bankers Association refers when a bank has expressed an interest in raising
capital.

We have a
strong professional network. We work with over 50 regional broker dealers,
investment banks, law firms, and state bank associations of which when a CEO
or CFO of a community bank has made a decision to raise capital, we tend to
get the first call. Not just because we are only one of the largest
investors, but because we are one of the few investors entirely dedicated to
this space. Therefore, we do see quite a bit of activity.

Once we have
an inbound inquiry, we do what we call a “pre-screening”, whereby we pull-up
information on the bank. Banking is quite unique in this country relative to
every other industry sector. Every single bank is required by the FDIC to
file a perfectly standardized Call Report every single quarter and it is a
large report-- an 80 plus pages. It is unlike a 10K and a 10Q for public
company reporting that contains comparable information, but is not uniformly
reported. A bank Call Report is a perfectly standardized document. Line 123
on one report is the same line 123 as in other report. Therefore, the
availability of very granular data and transparency into banks is immense.

I also want
to mention, we have a proprietary software product at StoneCastle called
RAMPART™ that was built internally. RAMPART™ allows us to analyze call
report data, so when a bank calls and has an interest in raising capital we
can respond quickly. We review and verify all of the available data about
the bank: it’s market and historical financials, information that we use to
qualify the organization. If it does meet our investment objectives, then we
have an in-depth call with the bank and we start asking very routine
questions that help us to understand the nature of that bank within its
community.

CEOCFO:What might you look at that less knowledgeable people in the industry
do not recognize as relevant?

Mr. Siegel:

There are a
number of things. One important thing to keep in mind is where we invest
within the capital structure of a bank. StoneCastle tends to invest using
preferred stock, or a form of debt. Very rarely do we invest in common
equity. Therefore, the underlying bank’s profitability is very important,
but it is not our first or only criteria. What we look for is financial
stability and a very conservative approach to banking. Unlike others who may
primarily focus on the fastest growing or most profitable banks, we tend to
favor the long standing and stable companies within the industry. When we
analyze a bank we proceed in the following order – management, market and
balance sheet. It is in that order for a reason.

Let’s start
with Management. We like to see if management is active in their
communities. Let me tell you why that matters. Most local banks are locally
owned by members of the community. If the shareholders of the bank are the
management’s neighbors, family and social network, they are probably not
going to go on a limb and take a great deal of risk. But, if that management
team flies home every weekend, or is a professional CEO that has been
transplanted from New York to Oregon, let’s say, it is too easy to move back
to New York if it doesn’t work out. Not so with a community bank CEO that is
a pillar of the community. Therefore, you want that local connection.

Most people,
when they analyze a company as an investment, they look at the financials
first. In terms of community banking, that is the last thing they should
look at. Not that it is unimportant, but financials do not give the depth of
information about the management and the market. For example, within a
financial analysis, an investor would look at a bank’s loan book. A bank’s
typical loan book is making loans that are on average about 5 years in
duration. That means statistically every 5 years all of those loans will
turn over, and there will be a new set of loans. We want to understand why
the management is choosing to make those loans and how he arrived at the
decision. So understanding how a management thinks is critical to
understanding the future of that bank.

A community
bank is not much more than a vessel to own what we call community risk. It
is typically local business risk and local real estate risk with very little
direct to consumer. Therefore, when we are looking at that community, which
may consist of a town or a few towns or a county being the footprint of a
bank, we first want to understand how management is aligned to their
community; how they are trained. Are they aggressive lenders? Are they
conservative lenders? And how is management compensated? You want a bank
that is aligned with their community long-term. This allows us to invest in
a broad range of banks.

Now, next is
the market, and most people do not obviously look at it. Let me explain the
importance of the market.

If you and I
were analyzing a bank to invest in and we looked at management and they
passed all the tests, convincing us that they were capable, experienced and
conservative, let’s say. Then we looked at the financials next and found the
bank to be well capitalized and very profitable. We might first come to the
conclusion that this bank looks like a good investment.

However, that
analysis doesn’t take into account the market. If I were to mention to you
that all of the people who work in the town were employed at one auto parts
manufacturing plant, there might be market risk if the plant closes. If we
do not understand the underlying local market risk, we are not getting the
full picture. So, along with how good management is or how robust the
financials are, market risk needs to be taken into account. StoneCastle
analyzes market risk by gathering information on the demographics of the
community, like average age and average income level. We ask about the
affordability of housing and what is the vacancy rate is in commercial real
estate? We ask about the largest industries and the largest employer in the
area. All of these factors about a local market give an enormous insight
into the bank’s future prospects.

For example,
imagine a market such as Michigan. You might think Michigan did not do well
during the crisis. But certain parts of Michigan such as Ann Arbor did just
fine. The reason Ann Arbor did well was because of government, healthcare
and education jobs, i.e., jobs that tend to be recession resistant.

Therefore,
asking management the right questions and looking at the right markets gives
us a strong picture and puts a bank’s financials into context. Finally, we
look at the financials to see if the amount of capital and the bank’s
liquidity are consistent with the management’s description of their market.

To further
answer your question of what we do differently from others is that
StoneCastle Partners is focused entirely in one industry sector and
specializes in that business. Our firm is doing $13 billion of business in
one industry sector, community banks. It is easy to identify things that
look completely out of whack compared to the other banks in the country. In
contrast, if you invest and manage 30 different industries, it is hard to
find those nuances.

CEOCFO:Is there a geographic component to the banks you choose?

Mr. Siegel:

We invest
nationally and today, StoneCastle Financial has over 120 different banks in
approximately 35 states. StoneCastle Partners, LLC, which has other products
including a deposit business, has exposure in all 50 states, including
Alaska.

But every
single market, every micro-market, for example, has a certain demographic,
affluence and nature to it. Take Winter Park, Florida, for example. If you
drove 20 minutes north, south, east or west you could end up in a town that
has a completely different profile. So, to say, I like North Florida or the
Orlando area, does not mean anything. To invest in community banks, an
investor has to get down to a community level and understand exactly where
the branches of that bank are, and what communities they are serving, and
the nature of that community, because it can be dramatically different, even
10 or 20 miles apart.

CEOCFO:Once you have invested in a bank, how do you keep track of what they
are doing? Where does the human component come in when you are doing your
review?

Mr. Siegel:

As I
mentioned, the banks report their financials on the FDIC Call Reports every
quarter. They are publically available on the FDIC website for every single
bank in the country. The data is imported electronically into our RAMPART™
system, which makes the analysis efficient. Rampart™ does not do the
analysis for us, but it assembles the information to be more easily handled
by our analysts. What the analysts look for are quarter-to-quarter trends.
Banks rarely become distressed overnight. They tend to decline over a period
of time and with RAMPART™, we can be ahead of a trend.

We bring this
kind of community bank information to our investors who cannot otherwise
source it through their own research or advisors. That is the distinction
here and the answer to your question about the human component. We are not
simply buying securities available on the market. We directly originate
deals. We make direct investments in a business based on relationships. And
in our business, we take the time to meet with banks, go onsite, and go
through loan books. We review board minutes and management biographies. We
drive through their communities.

In order to
monitor ongoing operations, StoneCastle will review the public information
and look through government databases, for regulatory orders or any issues
on the institution. We actively contact the banks and if it is a very
healthy bank we will talk to them once a year. If they are trending below
their peer group, we will probably call them every quarter for a discussion.
If they are troubled, which we currently have none, we talk to them every
week. Therefore, the human component is important and ongoing, because we
constantly look at the data around the market.

I used the
example of the local markets auto parts manufacturing plant earlier. Again,
if we just focus on financials, you may be invested in a bank, of which the
loan book looks fantastic with almost no non-performing loans. But in our
analysis, if we learn that the largest employer, the auto parts plant is
closing, we may know of the potential for a problem even earlier than the
bank. If we are aware that the plant may be closing, we may decide to sell
that investment or we may talk to the bank and make them aware of the
situation. We will work with the bank since they may want to increase their
liquidity or capital ahead of the closing, in the unfortunate event, that
people may become un-employed and/or fall behind on their loans. This
granular information also helps in having an active role in helping banks
avoid any regulatory trouble. In the past, we have taken this course of
action in order to protect our investment.

CEOCFO:You recently announced quarterly earnings. How is business?

Mr. Siegel:

Business is
quite good. We have had three and a half years with no credit losses. We
have nothing on watch right now that is declining in quality. We earned
$0.39 in Q4 2016 and on March 10th declared a dividend of $0.37
for Q1 2017. The stock price returned approximately 24% for 2016 including
the reinvestment of dividends. The trend in our performance relative to
other income alternatives is quite strong. We are dealing with an investment
grade quality set of securities, so it is a comparatively benign risk
relative to other ways investors can achieve an approximate 7% dividend
yield in an investment grade quality portfolio.

CEOCFO:Does the investment community understand what you are doing?

Mr. Siegel:

Yes.
Investors are better at understanding the investment attributes in
Stonecastle Financial Corp. When we launched, I like to say we were a purple
chicken; no one ever saw anything like our company. They did not know how to
compare us to other investments or how to think about our company. We
believe the market is recognizing the performance of the management and how
we approach the business. The yield used to be up in the 9% range and now we
are down to the mid-7%s. Today, we believe that investors are attracted to
StoneCastle because of the relative value we offer in the market. When you
look at comparable credit risk BBB indices, some are yielding in the 3% or
4% range. We have a maintained a consistent stable income stream and quality
of assets in the portfolio. We believe investors, over time, will value the
predictability of an income stream given our current portfolio.

CEOCFO:Put it together for our readers in the business and investment
community. Why pay attention to StoneCastle Financial Corp.?

Mr. Siegel:

Investors
should pay attention to our common stock because we believe it is a way to
earn mid 7% yields and current income with a more conservative risk reward
profile than other comparable alternatives in the market.

More
importantly In the current market, the community banking industry has
interesting tailwinds with an inflection point in interest rates, the
potential for changes in the regulatory environment, and industry
consolidation. To make this point, in a market with increasing interest
rates, banks can produce higher earnings and have a compounded rate of
return on those earnings. Almost all other companies have lower earnings
when interest rates go up because their debt costs go up. For banks, higher
interest rates are counter cyclical to the market. Investment in community
banks is a reasonably uncorrelated market because it is tied to small and
rural communities, not to national issues. Irrespective of these tailwinds,
small towns across the country continue their daily routines and just go on
irrespective of the national environment and politics of Washington D.C.
That is what is nice about this industry. There are no derivatives, no
consumer lending, no mortgage production.

Therefore,
investors who desire an income vehicle with a dividend yield in the mid-7%s,
and a high quality investment grade portfolio of banks might want to pay
attention to us. We believe StoneCastle Financial offers a stable and
diversified income vehicle with a national geographic reach, without the
banking exposure you usually have with large money center bank.

Community
banking is a very old school model of banking, like the George Bailey “It’s
a Wonderful Life” model of banking.

“StoneCastle Financial Corp. is a unique vehicle on the public markets
solely dedicated to investing in Community Banks. The Company’s investment
objective is to provide income and to a lesser extent capital appreciation
through investment in preferred stocks, subordinated and senior debt, and to
a lesser extent common shares” -
Josh Siegel, Managing Principal of StoneCastle Partners